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Portfolio Manager, PN Vijay has a view that it is difficult to predict the market evels but if some of volatility seizes and sane trading starts, the market may go up from these levels. He adds that Indian markets in middle of January had run away a lot and valuations were getting too steep for comfort but that’s got corrected somewhat

Excerpts from the exclusive interview with PN Vijay:

Q: It has been a bad week so far, do you expect more downside or will the markets to just hang around these levels for a while?

A: Tough call to make, my reason tells me that we should move up from somewhere around these levels but there has been so much of disquiet and anxiety in Indian markets that it is difficult to make a call. Just look at the facts. Since January 1, the Dow, which is the epicenter of this global turmoil, has lost slightly over 7% and we have lost close to 15%. Just imagine we have lost double.

Theirs is the economy going into recession and which is going at 8-9% growth and we have just lost it and again after the Budget, every economist in Delhi says that the goodies the Finance Minister has given in the commercial banks is something unbelievable. The banking sector has just fallen apart, so something seriously is wrong with the way the markets relating to the fundamentals.

So it is very difficult to say when all this will change but at least today we have a good day and one is hoping that the valuations are looking quite nice now. The only issue about Indian markets in middle of January was that they had run away a lot and valuations were getting too steep for comfort but that’s got corrected somewhat, so if some of volatility seizes and some sort of sane trading start, we should probably go up from these levels.

Q: What’s happening with midcaps and smallcaps. Today we have seen some recovery in the index but midcap and smallcap portfolios were still have been down in the red. Are you seeing HNIs and retail throwing stock in absolute disgust and disappointment? Why are midcaps languishing like this?

A: About HNIs, we can see that this got out of the market. We have had very few redemption calls from our HNIs but there seems to be a total lack of interest. I think Reliance Power had something to do with that. They all went so gung-ho and now they have just got put off. So we are not seeing the type of selling we saw or request of selling we saw in October ’07. There is lack of volume and nobody is saying, “This share has gone down a lot why aren’t you buy this.” In a way it’s a good sign because they are not selling out but midcaps and smallcaps are suffering from a total lack of patronage from these constituencies.

Q: The one stock, which started in a scary way this morning, was ICICI Bank but then recovered in the second half of the day. How have you read the developments on ICICI Bank and the big fall that stock has seen at 10% in the last two-days and then 40% nearly from its peak?

A: I tend to agree with the foreign brokerages that ICICI fall has been just overdone. The numbers themselves tell that there is USD 50 million plus USD 25 million hit provision that they are taking on their investments and not on their loans. Mark-to-market investments is very standard procedure and to that extent, some of it is already been NPAed in the first two quarters. The future is mitigated, so I think the market did deserve to give a bit of a pounding to ICICI Bank but not to this extent because the one good thing about the Indian banking system is because of our own structural deficiencies and stamp duties deficiencies. There is no subprime market in this country - there are no subprime loans and there is no securitisation of loans, so this is a non-existent problem as far as we are concerned. So the exposure is only to Indian corporates who have been fishing around a little bit globally and that’s very containable.

Q: How long do you think we will need to negotiate these kind of global headwinds because anybody who wants to buy today with cash is also worrying about how long this global turmoil and that news will continue to come in and there is a certain deferment which is going on of purchases even despite good valuations? How long do you think this kind of a situation might continue?

A: Some good news in India could change the trick as far as India is concerned because generally everyone has agreed that this fall has been overdone. Fund managers, HNIs all agree that trade wise or economy wise, they are not that much affected by the home loan crises and the financial crises in the US but it’s a question of aversion to equity. So sentiment could change it because even the FIIs selling in India has not been very much in February, in fact they bought close to Rs 5,000 crore, so it’s not the type of heavy selling to take the market down. So we are talking about absolute sentiment here and something positive from the government, nuclear deal signing which everyone is talking about in Delhi could turn the trumps and we need something like that because right now it is absolute apathy among domestic investors.

Q: Power has been one of the biggest losers in the last couple of months and yet stocks like Reliance Energy, Suzlon, Tata Power,NTPC continue to slip more. Do you see value here or do you think these stocks have still have not shed their baggage of over ownership?

A: There is over ownership compared to FMCG or pharma but they have become really valuable because talking to people in the power sector, a lot of investment is taking place in transmission and in generation. The tenders are out for the 5-mega power projects. If one sees the Q3 and Q4 results of last calendar year, they have all run up a lot and whoever has heard of BHEL quoting at 45 PE and so on. So the correction to some extent was desirable but it is really good to see these stocks available so cheap with NTPC below Rs 200.

Another thing interesting, if you saw the last bull market last three years, pharma, FMCG and IT were the worst. Now for some reason, the smart money has gone in a big way into these sectors in the last few weeks including the autos which means that there is a tremendous balance to the index, so something happens to the good old L&T, BHEL and Reliance going, we could see Nifty climb up pretty swiftly.

Q: What’s happening with real estate? Stocks have halved there and not the small stocks; the largecap names DLF from Rs 1,200 to nearly Rs 600, Unitech is languishing at Rs 300. Do you think there is more downside here in the largecap real estate names?

A: Not a few talk to the owners; one has been touching base with them about the way they are bidding for new projects and new tenders at least in NCR some of the biggies; the type of money they are laying out to buy land from the government is unbelievable. Real estate space in the middleclass and upper-middleclass space in NCR is still very strong; Gurgaon has gone down maybe 4-5% but other places are very strong. So, on the ground in real estate none other players are talking about demand recession but market to some extent it’s psychologically linking the Unitech and DLF with the American home loan market. So to some extent I think poor guys are suffering from a severe jolt in sentiment.

Source: Moneycontrol.com